A simple solution?

Asset allocation is one of the biggest challenges today. Diversification is very difficult to achieve in a global market where money flows link markets almost instantaneously. The backbone of wealth management has been the balanced portfolio for decades. But there are instances, like the current one, where correlations between bonds and equities are high and positive, which presents a challenge. One solution is to include liquid alts (long/shorts, CTAs, etc), which usually works, until high correlations permeate into those strategies as well, and they stop acting as diversifiers. With the recent appearance of inflation in our lives on 2020, commodities have moved into the asset allocation tool box as an asset class that brings great diversification benefits. The problem is, they’ve been so out of favor for so long, very few people fully understand their dynamics and how to play them. Nevertheless, they’re working. In the chart below, you can see a portfolio that is a variation of the balanced one. 25% in stocks, 25% in bonds, 25% cash and 25% in commodities. And guess what, it is having the best year since 1933, almost 100 years ago. It’s interesting because 1933 was the aftermath of 1929, the year where the Great Depression started. We don’t have the same economic conditions we had at the time, and yet we are obtaining a similar pattern. There is a lot of talk about a commodities supercycle on the back of structural inflation as a result of reckless fiscal policy (globally) and loose monetary policy. Can the solution to the balanced portfolio be that simple?

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